Friday, September 16, 2011

IRDA plans to scrap Highest Guarantee Plans

In order to keep the equity markets away from any systemic risks, the Insurance Regulatory and Development Authority (IRDA) is planning to scrap the highest Net Asset Value (NAV) guarantee products. This could further dent the sales of the Unit Linked Insurance Plans (ULIPs) as the highest NAV guarantee products account for 20% of ULIP sales.

Under the highest NAV guarantee products, customers are guaranteed returns based on the highest NAV a policy has achieved during the entire term of the insurance plan. However, IRDA is weary of the fact the insurers protect the guarantee by appropriately apportioning money in debt instruments. When the market falls the exposure in debt instruments increases and insurers try to sell equities at marginal profits. If there is too much concentration of such products in the market, a large number of insurers might sell equities at the same time to protect the guarantee, leading to a further market fall which leads to systemic risks.

In my opinion the IRDA has done the right thing by putting a stop gap on the so-called 'highest NAV guarantee plans'. Many investors have been lured to buy such ULIP plans by their agents / distributors / relationship managers in the name of providing huge returns based on the highest NAV achieved by the plan in its tenure.

Policyholders should keep in mind that insurance is for indemnifying your risk, and thus insurance and investment needs should be dealt separately. For insuring yourself only pure term insurance plans are appropriate, and while investing you should give due attention to your investment objectives, goals, age, income, no. of dependents amongst others; which is a holistic investment planning process rather than an ad-hoc activity.

Also read the article posted previously on Highest NAV Guarantee Plans -

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